Differences in Canada and Australia’s approach to financial crisis resolution

MELBOURNE — Australia and Canada share many similarities: both are major members of the Commonwealth; both have a small group of large, national and very sound banks, all of which were largely unscathed from the global financial crisis and both countries are in some measure the envy of the world.

But there are differences, particularly in the way that some negative aspects of parts of the global financial crisis have been resolved.

For instance, there’s Australia’s Federal Court, which recently ruled against Standard & Poors, the global ratings agency that gave an AAA-rating to a product created by ABN Amro. That derivative product, known as the Rembrandt Notes, was purchased by 12 local municipalities all in the state of New South Wales, but lost about 90% of its value in the run-up to the 2008 global economic crisis. It’s understood that this is the first time that a ratings agency has faced trial over a complex financial product.

“S&P’s rating of AAA of the Rembrandt 2006-2 and 2006-3 CPDO [constant proportion debt obligation] notes was misleading and deceptive and involved the publication of information or statements false in material particulars and otherwise involved negligent mispresentations to the class of potential investors in Australia,” said Justice Jayne Jagot, who awarded the 12 councils about A$30-million for losses and damages. Justice Jagot, who termed the products “grotesquely complicated,” also slammed ABN Amro for providing false statements and information, particularly about the underlying volatility.

Piper Alderman, the law firm that represented the local councils, said the decision “is a major blow to the ratings agencies, which for years have had the benefit of profiting from the assignment of these ratings without ever being accountable to investors for those opinions.”

S&P said that it intends to appeal.

A A$115-million settlement was reached in a class-action law suit brought against National Australia Bank. The action stemmed from NAB’s announcement in mid-2008 that it had lost US$1-billion in the U.S. mortgage crisis — news that caused the bank’s share price to fall by 13.5% on one day. The US$1-billion loss was five times larger than what the bank told the market two months earlier. The settlement was reached a few weeks before the matter was headed for trial.

In Canada, a class-action law suit filed against CIBC that focused on the bank’s disclosure about its exposure to the U.S. subprime market — was dismissed on the grounds that the plaintiffs had failed to obtain the required leave to proceed with the action within the three-year period mandated by the Ontario Securities Act. But Justice Strathy added that had the limitation period not expired, he would have certified the action and allowed it to proceed to trial. That decision is under appeal.

Underwriting fees show another marked difference. Macquarie Capital is one of the few financial institutions that has a capital markets operation in both Canada and Australia. Macquarie’s equity capital markets business is run by Paul Donnelly, the former chief executive of the Canadian arm.

Over lunch and on the same day that his firm was the sole underwriter on a A$400-million financing for the Goodman Group, he pined for the healthy fees that Canadian firms receive for raising capital for their clients.

On that deal, the proceeds of which will be used to accelerate project development and facilitate entry into Brazil (one of its partners is CPP Investment Board), Macquarie will have to get by on a 1.5% fee, about one-third of what is typically charged by a Canadian firm.

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